The International Monetary Fund (IMF) today approved the second annual loan for Cambodia under the enhanced structural adjustment facility (ESAF)1 equivalent to SDR 28.0 million (about $41 million), in support of the Government's 1995-96 macroeconomic and structural adjustment program. The loan will be disbursed in two equal semi-annual installments, the first of which is avilable immediately.

Background

Cambodia is gradually emerging from years of internal strife. A large-scale effort mounted by the international community, in which the IMF has been involved since the begining, has helped bring a measure of stability. The process of rehabilitation and transition to a market economy is now well under way, and macroeconomic performance during the first year of the ESAF-supported program was generally favorable. Improved financial discipline has led to an increasingly stable economic environment, as is evident in the stability of the exchange rate after the wide fluctuations of previous years.

At 4 percent, output growth in 1994 was lower and less balanced than expected because of a sharp weather-related drop in rice production. Consumer prices rose 18 percent during the year, double the program target, largely because of a sharp rise in food prices. With the partial stabilization of these prices and continued fiscal and monetary restraint during early 1995, however, inflation has subsided to an annual rate of less than 10 percent.

Fiscal policy played a central role in maintaining financial stability during 1994 and early 1995. Despite significant overruns in security and defense spending, strong revenue performance and tight controls over nondefense spending kept the current fiscal deficit to 1-1/2 percent of GDP in 1994.

The 1995-96 Program

The 1995-96 program seeks to consolidate recent macroeconomic gains and raise the output growth to an annual rate of about 7 percent between 1995-97; reduce inflation to less than 8 percent by mid-1996 and to 5 percent by 1997; and increase official reserves to the equivalent of 2-1/4 months of imports by mid-1996.

To these ends, the current fiscal deficit is targeted at 1-1/2 percent of GDP in 1994, and 3/4 percent in 1996. The fiscal position should improve through a broadening of the tax base aimed at a durable increase in the revenue-GDP ratio. Although the Government's margin for maneuver on expenditures is severely limited by ongoing defense and security requirements, the budget aims to contain military spending at below 6 percent of GDP, with a further reduction expected for 1996 in the context of a military reform.

In the monetary policy area, plans are being drawn, with IMF technical assistance, for the issuance of treasury bills in late 1995. These will be used to establish a market-determined interest rate for the riel which is lacking because of the high level of dollarization in the economy and the very limited use of the national currency in the banking system.

Structural Reforms

The pursuit of structural reforms in the financial sector, civil service, military, and public enterprises is a key element in the Government's medium-term strategy. The authorities are reinforcing efforts to improve the regulation and supervision of the financial system with technical assistance from the IMF. The legal basis for regulation and supervision is also being strengthened with the help of a new central banking law.

The program also envisages progress in regard to public administration. In the context of a comprehensive administration reform, the number of civil service employees will be reduced by 10 percent by end-1996, with an additional 10 percent reduction by end-1997. A privatization law was adopted in December 1994, and a review of the activities of leased public enterprises is about to be completed, paving the way for the sale of assets to the private sector. The Government will also implement individual rehabilitation programs will be implemented during 1995 and 1996 for those enterprise remaining in the public sector, which will include elimination of public transfers and credit from the National Bank, and only limited availability of credit from commercial banks.

Social and Environmental Issues

Limited public resources constrain the development of a social safety net for a broad cross section of the population. Nevertheless, in order to make more informed decisions with respect to expenditures affecting the more vulnerable groups of the population, the Government will prepare a poverty assessment program based on a recently completed socioeconomic survey.

The authorities are commited to avoiding an environmentally unsustainable rate of logging and are working on a forest management code. Meanwhile, a ban on logging exports since May 1995 serves as an interim solution. A National Protected Areas System covering 3.3 million hectares designated for national parks, wildlife sanctuaries, protected areas, and multiple-use-management areas is also under development.

The Challenge Ahead

Cambodia has made substantial progress over the past two years despite difficult circumstances that include an unstable security situation. Consolidation of the initial gains on the macroeconomic front will require perseverance in maintaining financial discipline; improving transparency in government transactions; and containing fiscal pressures, notably those arising from high levels of defense and security spending.

Cambodia joined the IMF on December 31, 1969. Its quota2 is SDR 65.0 million (about $96 million), and its outstanding financial obligations to the IMF amount to the equivalent of SDR 34 million (about $50 million).

1. The ESAF is a concessional IMF facility for assisting eligible low-income developing members that are undertaking economic reforms to strengthen their balance of payments and foster growth. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years, with a 5-1/2-year grace period.

2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.